If you’re a first time renter, you’re probably wondering how rental deposit works. If that’s you, then this article aims to shed some light on rental deposits as well as zero deposit schemes.
Let’s start with the basics — what are the types of rental deposits?
1. Holding Deposits
Holding deposits are usually equivalent to a week’s rent and their purpose is to reserve the property with the landlord. The flat/house gets taken off the market whilst the reference checks are being conducted. You pay the holding deposit to ‘hold’ the property until your checks come back.
If your reference checks are successful, then the holding deposit will normally be offset against either your rent for the first month or the tenancy deposit.
If your reference checks are unsuccessful, the landlords are likely to return your holding deposit — provided you’ve submitted all required documents timely and without trying to stretch the truth.
However, an important point to note is that if you are trying to reserve more than one property and have paid multiple holding deposits, you may lose the holding monies if you withdraw your application.
As such, Repit recommends only paying a holding deposit on a property you really want — otherwise it’s not really worth losing a week’s worth of rent.
In any event, you should clarify the terms of the holding deposit each time — and what will happen to the money once it has been paid.
A few questions that are recommended to ask before you hand out your holding deposit money are:
- What is the holding deposit for?
- What will happen to the holding deposit if my application is successful?
- What will happen to the holding deposit if my application is unsuccessful?
- How and when will I get the holding deposit back?
Holding deposits are often also called reservation deposits and as such are different from tenancy deposits.
2. Tenancy Deposits
Tenancy deposits are paid at the start of the tenancy and are usually also called security deposits. The money can be used by the landlord to cover costs such as rent arrears or property damage at the end of the tenancy.
A legislation that came into force on 1st June 2019 states that it is illegal for landlords and estate agents to charge renters extra fees. In practice, it means that landlords and agents are only able to charge the deposit, now capped to 5 weeks’ rent, and aren’t able to charge for a range of admin fees they have previously done.
So how to calculate your tenancy deposit? If your annual rent is below £50,000, then you can be charged the maximum of 5 weeks’ rent. So, take your monthly rent and multiply it by 12. You’ll get an annual figure, which you now divide into 52. Having established your weekly rent, multiply it by 5 to get an idea of the maximum tenancy deposit.
Monthly Rent x 12 ÷ 52 x 5 = Maximum Tenancy Deposit
If your annual rent is more that £50,000, then the maximum tenancy deposit is capped at 6 weeks’ rent.
Are tenancy deposits regulated in any way?
Yes – there are 3 deposit protection scheme providers, and your landlord or agent must protect your deposit with one of those authorised schemes if you have an assured shorthold tenancy (which is the type of tenancy most private renters have).
The landlord/agent is under an obligation to protect your deposit with one of the three approved schemes within 30 days of receiving the payment. Your landlord/agent must also send you a confirmation as to which scheme is being used, including all the details of the scheme — this document is known as “Prescribed Information”.
If your landlord fails to protect the deposit within one of the schemes, a court can award a penalty of up to three times the value of the deposit to the tenant.
The three deposit protection scheme providers are:
Each of the providers runs two schemes — an insurance scheme and a custodial scheme. There aren’t many practical differences between the two for the tenant. For both types of schemes you can use the scheme’s dispute resolution service and claim the money back in case of a dispute.
Getting your deposit back
You are entitled to receive the full amount of your deposit back at the end of your tenancy unless the landlord/agent has a good reason not to pay it back in full.
Usually, at the start of each tenancy, the landlord/agent provides you with an inventory. It is worth having a quick look around and comparing the actual state of the flat with what’s written in the inventory. It can be the case that sometimes the inventories are dated – for example listing a wardrobe that is no longer there or a chest of drawers in a ‘nearly new’ state when it clearly isn’t.
You can email your landlord back at the start of the tenancy and raise any concerns regarding the inventory then. If you do not do that, the landlord may dispute your deposit at the end of the tenancy as the ‘official’ state of the flat is what the signed inventory says.
Issues with the property
If there are any issues with the property throughout your tenancy, you must report it timely. Leaking sink? Laundry machine making funny noises? Call the landlord immediately.
Firstly, issues with the flat make your experience there more irritating (and who wants that) and secondly, it gives the landlord the chance to sort it for you before an issue escalates – or before you move out when the landlord can regard it as damage and cut your deposit.
Before you move out, ensure you have paid all outstanding rent. It may sound obvious, especially that it is common practice to set a monthly direct debit. However, imagine a situation when your direct debit goes on the 1st of every month. You hand in your 4 weeks’ notice on the 5th of a month and cancel your direct debit at the same time. You move out on the 5th of the following month. If you do not pay for the 5 days, your landlord will deduct it from your deposit as outstanding rent.
It will only take a few minutes for you to document the state you leave the flat in – and can save you your deposit if the landlord thinks it’s messy and wants to hire a cleaner.
Wear and tear
Remember – your landlord cannot deduct your deposit for reasonable wear and tear connected with living at the property. Therefore, if there’s an issue, your landlord must always write to you what exactly they’re reducing the deposit for. That way, you can negotiate with them. Particularly useful when you’re renting as a student as student landlords can be very unreasonable!
What to do if you can’t afford a deposit?
Let’s be honest here — putting a deposit down on a new home is probably one of the biggest expenses connected with moving. Especially if you haven’t had the previous deposit returned to you yet.
However, there are now a number of companies and schemes who come to the rescue and offer to pay the deposit on your behalf.
In a way, those deposit replacement schemes act like a loan facility and cover the value of the deposit. The schemes will support the process of any deposit claim at the end of the tenancy - they are able to argue on your behalf and they have a good understanding of the process.
3. Zero Deposit Schemes
Zero Deposit schemes are an alternative to traditional tenancy deposits, with the aim of cutting the upfront costs of renting for tenants, whilst providing the same level of protection for landlords. Sounds like a win-win?
It is in a way, as everything remains the same for the tenant — you still have to pass the referencing, and check-in and check-out procedures remain the same. You will also still have to reimburse the landlord if there’s any unpaid rent or damage to the property at the end of your tenancy.
How does it work?
A landlord/agent will usually put you in touch with a zero deposit scheme, which will then send you an online quote. The quote is often equivalent to one week’s rent plus an additional fee, for example £49 with Zero Deposits. After that, copies of all the paperwork get sent out to the parties involved.
The benefits are threefold.
For landlords, zero deposit schemes cover equivalent to 6 weeks’ rent — and even up to 12 weeks’. They are also free to use for landlords.
For tenants, zero deposit schemes are a way of avoiding a very high cost upfront and keeping your money in a vacuum. The schemes only ask for a reduced amount of money, usually capped at 1 week’s rent — as opposed to 5 weeks’.
Zero deposit schemes make agents happy as well. With the 2019 legislation banning admin fees, agents are able to recuperate some of their income through the commission the schemes are paying them.
What are the cons?
The zero deposit schemes work as a kind of insurance policy. As a tenant, you pay to take out the policy. At the end of the tenancy, it is the landlords who can make claims against it. The problem with the deposit replacement schemes is that if a claim by a landlord has been made, it is the tenant who has to pay out.
The zero deposit schemes do not cover any damage to the property at the end of the tenancy.
Zero deposit schemes are useful when you’re short for cash at the time of renting. They do not pay the landlord out at the end if there’s damage at the end or that there’s some rent unpaid. If so, it is up to you as a tenant to cover those costs.
Another important point to note is the regulation and risk of the zero deposit schemes. The schemes are not covered by the current legislation protecting tenancy deposits, and not every scheme offers Financial Services Compensation Scheme protection if they go bust. Moreover, some schemes operate without the authorisation form the Financial Conduct Authority at all.
A new alternative?
Worth mentioning is the service offered by Fronted where for an admin fee of £49.95, they will pay your deposit for you as a way of a loan.
Usually renters must pay a new deposit before getting the old one back and Fronted comes in to fill the gap. Realistically, if you’re a renter there is a great chance that you will end up with double 5 weeks’ rent with two different landlords/agents. Yikes, that's a lot of money!
In order to apply to Fronted, you must have a deposit with one of the government schemes and produce a certificate as proof. Fronted runs soft credit checks, you pay a fee, and then they issue an interest-free ‘loan’ for the amount of your deposit that is in a scheme. Once you get the old deposit back, you pay Fronted back (and within 90 days).
Another positive is that the deposit Fronted pays for you is interest free! So for example if your deposit is £1,000, you will only end up repaying £1,000 (plus £49.95 admin fee).
However, there are some cons.
Firstly, you can only use Fronted services if you’re a renter with a deposit held with one of the schemes. So if you’re a first-time renter, you have to splash out for a deposit yourself (or use one of the zero deposit schemes).
Secondly, if your new deposit is higher than your old one, you must pay the difference. So for example, if your old deposit is £1,000 but your new one is £1,500, Fronted will cover £1,000 only.
Either way, Fronted could be useful to help with the high costs of moving properties.
To sum up, a tenancy deposit is a lump of money capped at 5 weeks’ rent that at the end of the tenancy, can be used by the landlord to pay for any damage to the property.
The landlord is under an obligation to register under one of three authorised deposit protection schemes.
There are a number of zero deposit schemes available on the market, which pay the tenancy deposit for you in exchange of a one week’s rent and an admin fee.
It reduces the costs of moving but also comes with risk in case there’s any damage to the property at the end of your tenancy as the zero deposit schemes do not cover it.
Any questions — get in touch with Repit and we will sort all the legal work for you!